Tech IPOs Out of Favor, And May Be for Some Time

Tech companies once dominated the U.S. IPO calendar -- but not anymore.

During the dot-com craze nearly a decade ago, practically every other IPO was by a tech company. Last year saw a revival, with 37 information technology companies raising $7.6 billion -- their best showing since the bust.

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Yet so far this year, only three IT companies have gone public, raising $531 million, according to Thomson Reuters data, as risk-averse investors gravitate toward surer bets.

Friday's offering by San Antonio, Texas-based Web hosting company Rackspace Hosting -- the first tech IPO since February and the first venture capital-backed IPO of any kind since the first quarter -- helped show why some are hanging back. Its shares dropped 20 percent on their debut.

"It's never been this rough to get tech companies to IPO," said Mark Heesen, president of the National Venture Capital Association.

To be sure, overall market sentiment has been unforgiving toward all industries.

Kentucky-based coal producer Rhino Resources shelved its IPO last week, and Chinese advertising company China Mass Media International Advertisinghad to halve the number of shares in its offering to get to the launch pad. Its shares are down 15 percent since the IPO last Monday.

Even in the popular solar sector, GT Solar International is trading 27 percent below its opening price.

Still, tech companies are waiting longer in the pipeline, and with fewer VC-backed tech IPOs, more small companies are expected to look toward being acquired instead.

"We're seeing entrepreneurs more than willing to go the acquisition route rather than go public," Heesen said, adding that many tech companies now seem to want from the outset to be acquired instead of becoming giants in their own right.

One of the 12 withdrawn tech IPOs this year was from Danger, a mobile services company bought by Microsoft.

"When they look at how long a trek it is to go public, an IPO is no longer the golden ring," Heesen said.

FORMER DARLINGS

Part of the problem is IT companies seeking to go public often only have a short track record that would-be investors can scrutinize.

Given the credit crisis, a weak economy and turbulent markets, investors are more risk averse than they have been for quite some time. Taking a chance on techs that have not proved themselves is seen as asking too much of many investors.

"Most tech IPOs tend to be smaller, high-growth companies with a relatively greater degree of risk," said Paul Bard, an analyst with Greenwich, Connecticut-based IPO research firm Renaissance Capital. "So it becomes harder to prove themselves to an IPO audience that is looking for a lower amount of risk."

Skittish investors have been parsimonious lately, sending valuations down even for good companies, he said.

"With nine of the last 10 IPOs trading below their initial price, companies see this and are willing to wait it out," Bard said.

Heesen said the time between getting VC funding and going public has reached a record 8.6 years, versus a normal time of seven years, while a survey released last week by consultant Ernst & Young found companies wait six months between filing to go public and debuting -- double the amount from last year.

"Companies that need these funds to grow will at some point look at alternative sources," said Jackie Kelley, Americas IPO leader at Ernst & Young.

The slowing economy also might affect their prospects.

"Because of the slowdown, companies are looking at their IT budgets," said Robert McCooey, the senior vice president responsible for listings at Nasdaq OMX Group.

Still, he estimates about 25 percent of the companies in Nasdaq's IPO pipeline are IT companies, in line with the exchange's historical averages.

SIGNS OF HOPE

And the Ernst & Young report found tech companies are still the leading sector, along with biotech, in the IPO pipeline.

Also, exchanges are betting tech companies will come back.

"Hopefully when the market is open again, tech companies will be ready," said Scott Cutler, a Palo Alto, California-based senior vice president with New York Stock Exchange operator NYSE Euronext.

Among the tech companies interested in going public, he said, are social networking services and new media and Internet companies. But for these hopefuls to succeed, investors will have to add some faith to their analytical reasoning.

"Sentiment can change quickly," Bard said. "We need the market to stabilize, and see one or two companies that step up and have a strong debut."

But that may take a while, Heesen said. Many venture capitalists only expect a turnaround in the second half of 2009. "That's a year from now," he said. "That's a long time."